Question

Question #1: Stock Y has a beta of 1.4 and an expected return of 15.2 percent. Stock Z has a beta of 0.7 and an expected return of 9.1 percent. If the risk-free rate is 5.4 percent and the market risk premium is 6.4 percent, the reward-to-risk ratios for stocks Y and Z ________are _________ and percent, respectively.

First blank = 7.00

Second blank = 5.28

I am not sure if the second answer is 5.28 or 5.29 ? please help confirm my answer

Answer 1

Reward to risk ratio is calculated as:
= (Return of the stock - Risk free rate) / Stock beta

Reward to risk ratio for the stock Y =(15.2% - 5.4 %)/1.4
= 9.80%/1.40= 7%

Similarly, the reward to risk ratio of the stock Z = (9.1% - 5.4%)/0.7
= 3.70%/0.7
=0.052857 or 5.29 % (Rounded to two decimal places)

Note: It should be 5.29%